Financial News and Advice in Singapore

4 Reasons to Use a Credit Line Instead of a Credit Card

Why do you need a credit line when you can use a credit card or personal loan? Well, here’s 4 reasons why.

At first glance, a credit line may not seem different from a credit card, or any other kind of loan. In reality, a credit line is somewhere between the two–it combines the flexibility of a credit card, with the lower rates of a personal loan.

What is a Credit Line?

A credit line allows you to borrow up to a fixed amount (usually two to four times your monthly income), on an ad-hoc basis. There is no need to state a reason for the loan–just call and request the money, or apply online. In many cases, a credit line can give you an approved loan in as little as 15 minutes.

You can repay this loan amount in a flexible manner. You are only required to make a minimum repayment (often S$50 or 2.5% of the borrowed amount, whichever is lower) on each billing cycle.

A credit line is most useful under the following circumstances:

1. You Have Limited Retail Spending

Credit cards are best for retail spending–this is when you buy your shirts, bags, electronics, etc. Many credit cards give you no rewards (or limited rewards) for non-retail related spending. If you charge your utility bill to your credit card, for example, or use it to pay for a visit to the clinic, you will not receive much in the way of points.

As such, if you need a loan to pay for plumbing, electrical wiring, replacing your cracked windscreen, etc. try to avoid using a credit card. You are better off getting the money from a line of credit, as the credit card’s interest rate will overwhelm any possible savings.

2. You Cannot Repay the Loan Before the Next Billing Cycle

If you are faced with a significant sum (e.g. needing S$12,000 to pay for car repairs), you may not be able to repay it all before the next billing cycle.

You should never use a credit card for these kinds of long term debt–most credit cards have an interest rate of 24% per annum, so you should leave no outstanding debts on them. Always repay your credit cards in full, to avoid the high interest.

It is more tolerable to use a credit line for these “rollover debts,” as the interest rate is more manageable (around 9% per annum).

3. You Need a Bridging Loan

If your pay has been delayed, avoid going to licensed moneylenders or living on your credit card. You should also avoid taking a personal instalment loan, as there are prepayment penalties for trying to pay it off early once you get your pay (you must compensate the bank for the interest they would have earned, even if you make an early repayment).

A credit line can usually extend you enough to tide you over. The interest rate is lower than that of credit cards and licensed moneylenders, and there is no penalty to ending the loan as soon as your pay arrives.

As an aside, you should avoid living pay cheque to pay cheque. Save at least 20% of your income each month to prevent these situations.

4. You Need a Cash Loan Quickly

In some cases, you will be unable to rely on credit facilities (e.g. you are going abroad and need to bring physical cash). In these cases, you will want to take the loan in cash. If you do this through credit cards, you will be charged a cash advance fee, which is usually S$15 or 6% of the amount.

Always use credit lines responsibly. The ease and speed of credit lines do come with a drawback: as with credit cards, it often removes the “sting” of payment, as we do not need to produce the actual cash. However, multiple credit line deductions can accumulate fast–as with any loan, it is best used sparingly, and not for indulgences.

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